Fannie Mae Prepares for Possible Losses on Multifamily Loans This Year

Fannie Mae prepped for possible losses on multifamily loans this year by putting a big dent in last year’s profit margin, tracking with a trend among banks that have made similar moves because of recession fears.

The government-sponsored lender pushed loan loss reserves to $11.4 billion from $5.7 billion in 2021. That move contributed to Fannie Mae’s net income dropping from $22.1 billion in 2021 to $12.9 billion last year.

Funds put in reserve reflect a greater potential loss on multifamily loans than credit loss with single-family mortgages because that end of the business fell dramatically last year. Single-family convention loan acquisition volume fell 55% from $1.4 trillion in 2021 to $614.8 billion last year.

“We expect there will be economic headwinds in 2023 and that housing affordability will continue to remain a challenge for many homebuyers and renters,” Priscilla Almovodar, who became Fannie Mae’s CEO in September, said in a statement.

U.S. banks pushed commercial real estate lending to a record level in last year’s final three months at $1.78 trillion, driven by regional and community lenders. But banks also set aside more funds for losses in case problems arise.

Banking rules tightened in the aftermath of the Great Recession fueled by risky subprime home mortgages that soured when the housing bubble burst, requiring government bailouts of banks as well as Fannie Mae and its sister government-sponsored lender Freddie Mac. Both have been under federal government conservatorship since 2008.

Sales Down

Apartment investment sales dipped in the back half of last year after lending costs soared following the Federal Reserve raising interest rates quickly to tame persistent inflation. The consensus within the apartment industry is that the sales market won’t liven up until later this year as buyers seek lower prices to offset higher lending costs.

Ric Campo, CEO of Houston-based apartment real estate investment trust Camden Property Trust, told analysts on its earnings call earlier this month that the “bid-ask spread from multifamily assets is as wide as I can ever recall.”

The slide in apartment sales showed in Fannie Mae’s operations. Last year, it financed about 598,000 rental units, down from the 694,000 the previous year. In both years, most of the units financed were for renters earning at or below 120% of an area's median income.

Fannie Mae’s number of multifamily loans dropped from 4,203 in 2021 to 3,572 last year, the lowest level in at least five years. New business volume declining from $69.5 billion to $69.2 billion reflects the lower number of loans.

Net income for the multifamily sector dropped from 2021’s $3 billion to $2.2 billion last year. Fannie Mae said in the fourth quarter it set aside $1.1 billion for credit losses, about $900 million for the company’s seniors housing portfolio. The sector has been affected the most by current market conditions, Fannie Mae reported.

Reserves for multifamily loan losses makes up 0.43% of Fannie Mae’s multifamily book of business compared to 0.17% in 2021 and 0.32% in 2020 when the pandemic began.

In contrast, the reserves for single-family home loan losses are 0.26% of the lender’s book of business for mortgages, up from 0.15% in 2021 and lower than the 0.3% in 2020. The numbers were 0.3% in 2019 and 0.49% when mortgage lending was the strongest in 2018.